Killing the Messenger: A Deep Dive into Lorenzo v. SEC

By: Matthew Haan, IAC Student Intern Fall 2018

Close your eyes and think back to a time in your childhood when you and a group of friends played telephone. You know, that game where everyone sits in a circle and each person takes a turn whispering a phrase to the person next to him? By the time the last person in the circle heard the phrase, it almost always was never what it started out as. Whose fault was it when the phrase changed? The person who started the game? The person who misheard the phrase? What about the person who simply relayed the message? These questions likely remain unanswered. Luckily, the Supreme Court of the United States has agreed to hear a case that could finally provide us with some answers! Well, not really, but it’s pretty close for layman’s terms.

The Securities and Exchange Commission has been in the Supreme Court a good bit recently, and it is due to make another appearance. This term, the Supreme Court will hear the case of Lorenzo v. Securities and Exchange Commission. The central issue in the case will be “whether a misstatement claim . . . can be repackaged and pursued as a fraudulent-scheme claim.” Back in 2011 the Court heard Janus Capital Group, Inc. v. First Derivative Traders and, in an opinion authored by Justice Thomas, ruled five to four that a mutual fund investment adviser is not liable for making false statements under SEC Rule 10b-5(b) when the allegedly false statements come from the mutual fund prospectus. I know this sounds elementary right now, my dear reader, but there are reasons why the holding in Janus Capital Group was not as obvious as it seems. You are probably wondering how someone could ever be liable for statements that he never made.

While the Janus Capital Group Court definitively ruled on misstatement claims, the SEC in Lorenzo seeks to “repackage” the alleged misstatements under SEC Rule 10b-5(a), which prohibits advisers from engaging in fraudulent schemes. Courts of Appeals for various judicial circuits are split on whether a misstatement claim can be repackaged in this way as a fraudulent scheme claim. So far, the Second, Eighth, and Ninth Circuits have held that a misstatement claim cannot be the basis of a fraudulent scheme claim. The D.C. Circuit (which heard this case in September 2017) and the Eleventh Circuit have held that such a claim can be the basis for a fraudulent scheme claim. The split between the Circuits is what the Supreme Court hopes to resolve with its grant of Lorenzo’s Petition for Writ of Certiorari.

In this six-part series, I will tell you everything you need to know about this case. From the allegations and claims brought by the SEC, to the ruling’s potential implications for investors, I will have it covered. In Part Two, I will get down in the nitty gritty of the factual background of this case. So, make sure you keep it locked.